Quick Thoughts – STZ Q1 Earnings

nicklipinski

With the stock up solidly this morning we suspect that there won’t be any shortage of cheerleaders offering commentary on the company’s earnings release – the company reported Q1 EPS of $1.07 versus consensus of $0.93.

We believe that certain elements of the release warrant a more critical examination and though our cautious stance on the name has pretty much been dead wrong at this point, we think some of the current investor exuberance is unwarranted;

  • For starters, we continue to believe that the name is widely, perhaps overly owned.  While we acknowledge that consensus can be and often is correct, STZ certainly isn’t an undiscovered gem;
  • We also think the name is benefitting from the paucity of revenue and EPS growth stories across consumer staples and discretionary, and is therefore receiving a disproportionate level of investor attention, even as the story has, in some respects, worsened on the margin (specifically the cost of the planned brewery expansion now in the range of $900 million to $1.1 billion from $500 – $600 million originally contemplated – announced along with the prior quarter’s result).

It’s rare for a staples company to display sufficient confidence at the end of Q1 to raise full year EPS guidance, but STZ did just that, taking up EPS guidance at both the high end and low end by $0.20 per share.  This was after beating consensus by $0.14.  Our issues are minor, we suppose, in relation to this news, but worth highlighting nonetheless:

  • While EPS guidance increased, the company’s FCF guidance was unchanged, which strikes us as odd, and at a minimum lowers the multiple that we would be willing to apply to the incremental earnings;
  • The company’s wine and spirits business sales were lackluster, to be kind, with wine net sales declining 1.8% in the quarter and spirits sales declining 5.5% – the company mentioned planned inventory adjustments, which is fine, but segment operating margins improved 280 bps, courtesy of a “make whole” payment that was, essentially, 100% margin revenue.  The company avoided a direction question as to the size of the payment, but did suggest it represented 75-100 bps of wine gross margin;
  • While not uncommon for the quarter, the company’s beer shipments (+10.5%) were well ahead of consumption (+7.9%) – this likely will moderate Q2 shipments, but comparisons in the quarter are sufficiently easy that no one will likely care;
  • Beer shipment comparisons do stiffen in the back half of the year, and it should be noted that depletion volume growth has moderated each of the last two quarters.

Again, we have been pretty far from correct on this name in recent weeks, but perhaps some of this is due to our long history with the company and our associated view of management’s capital allocation history.  With the best deal in the history of the company gifted to the company courtesy of ABI, we continue to remain skeptical about the long-term prospects for STZ, but acknowledge the near-term business momentum.

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